Macroeconomics: Economic performance Flashcards
What is economic growth?
Long-run increase in a country’s productive capacity/potential national output.
What is the difference between short-run and long-run growth?
Short-run growth=cyclical
Long-run growth=driven by a sustained increase in LRAS
What is the difference between actual growth and potential growth?
Actual growth is an increase in an economy’s GDP over a specific period.
reflects the economy’s current performance
considers factors such as changes in consumer spending, business investment, government spending, and net exports.
Potential growth is the economy’s maximum sustainable expansion rate without generating inflationary pressures.
determined by the economy’s productive capacity, which is influenced by factors such as technological progress, labour force growth, and capital accumulation.
What is potential output (GDP)?
An economy’s productive capacity in a physical sense.
the largest output that could be produced, given the prevailing state of technology and stock of available resources.
An increase in potential output signifies long-run economic growth.
What is trend growth?
Long-term non-inflationary increase in GDP caused by an increase in a country’s productive capacity.
What are the drivers of short-term economic growth?
Expansionary monetary policy (lower interest rates etc)
Expansionary fiscal policy (direct and indirect tax cuts, increased gov spending and borrowing)
Depreciating exchange rate (more exports)
Strong growth of asset prices
Expanding employment and rising real incomes for those in work
Improved business confidence
Increased export sales from a boom/recovery in countries that are major trade partners aided by free-trade deals
What is long-term economic growth?
Long-run growth is a sustained increase in a country’s productive capacity.
What are the main drivers of long-term economic growth?
Improvements in productivity and a growing labour supply alongside the benefits of technological change.
What are the costs of economic growth?
Pollution, uses finite resources, destroys local cultures
What are the benefits of economic growth?
Increases standard of living and welfare, provides new environmentally friendly technology, increases peoples lives and reduce diseases.
What is an economic cycle?
Refers to the fluctuation of economic activity in an economy over time.
Involves alternating periods of expansion and contraction in real economic output, employment, and other key indicators.
What is actual growth/output?
The level of real output produced in the economy in a particular year.
What is trend growth/output?
What the economy is capable of producing when working at full capacity.
What are the stages of an economic cycle?
Boom: a period when % rate of growth of real GDP is fast and higher than the long-term trend.
Slowdown: a weakening of the rate of growth, real GDP is still rising but increasing at a slower rate.
Recession: a period of at least 6 months when an economy suffers a fall in aggregate output, employment, investment and business/consumer confidence.
Recovery: a phase after recession, during which real GDP starts to increase and unemployment begins to fall.
Depression: a prolonged downturn in the economy and where a nation’s real GDP falls by at least 10%.
What is sustained economic growth?
Growth which can be maintained over a long period of time.
What is sustainable economic growth?
Growth that takes into account the needs of future generations.
What is the output gap?
Occurs when there is a difference between the actual level of output and the potential level of output.
Measured as a % of national output.
What is the difference between a positive output gap and a negative output gap?
A negative output gap occurs when the actual level of output is less than the potential level of output putting downward pressure on inflation meaning there is the unemployment of resources in an economy, A positive output gap occurs when the actual level of output is greater than the potential output which could be due to resources being used beyond the normal capacity. Therefore, is productivity is growing, the output gap becomes positive putting upwards pressure on inflation.
What is the Kuznets curve?
Representation of the relationship between economic development and income inequality.
What are the stages of the Kuznets curve?
1) Low-income stage: income inequality tends to be relatively low as most people are engaged in similar occupations, and there are limited opportunities for significant income imbalance.
2) High-income stage: income inequality may increase. Industrialisation often leads to the growth of cities and the emergence of new industries resulting in wage imbalances between skilled and unskilled workers, as well as between urban and rural areas.
3) Turning point: Income inequality reaches its peak.
4) High-income stage: Income inequality is expected to decline. In post-industrial services, there may be more emphasis on service industries, education, and technology, which can lead to a more even distribution of income.
What are the drawbacks of the Kuznets curve?
May not be as relevant as the relationship between economic development and income inequality is influenced by a wide range of factors including technological change, globalisation, and policy choices.
What is an economic boom?
A period of strong economic growth, characterised by increased economic activity, production, and employment.
A boom happens when actual growth of real GDP is well above a country’s trend growth rate leading to actual GDP rising above potential GDP causing a positive output gap.
What is an economic slowdown?
Happens when the pace of growth drops.
The economy is still growing but at a weaker pace.
e.g. central banks might respond to an increase in inflation by raising interest rates to slow down consumer spending and business investment leading to an economic slowdown.
What is a recession?
Contraction in various key economic indicators e.g. real GDP, employment, consumer spending, business investment, and industrial production.
What is an economic depression?
More severe and prolonged economic downturn.
Lasts longer and can persist for several years.
Unemployment rates can reach very high levels and remain elevated for an extended period.
Including severe banking and financial crises, with widespread bank failures, credit contractions, and disruptions to the financial systems.
What is economic scarring? (hysteresis)
Medium-long term damage done to the economies of one or more countries following a severe economic shock which then leads to a recession.
What are the causes of economic scarring?
A fall in investment leading to an ageing of the existing capital stock.
Rise in long-term unemployment and economic inactivity.
Increase in business failures.
Shrinkage in the capacity of financial system to lend.
Where does an economic recovery come from?
Cuts in interest rates
One of more types of fiscal stimulus
A rebound in business and consumer confidence
What are demand and supply-side shocks?
Economic disturbances that can impact an economy’s equilibrium.
What is an example of a demand-side shock?
Financial crisis which reduces consumer and business confidence leading to a sharp decline in spending, causing a demand-side shock.
What is an example of a supply-side shock?
A sudden, unexpected rise in commodity prices. Rapid increases or decreases in the prices of essential commodities (like oil) can affect production costs and AS.
What is unemployment?
Someone must be of working age, willing and able to work, and actively seeking work but cannot find a job.
What are the 2 main measures of unemployment?
Labour force survey: asks 60-70,000 UK households to self-classify as being employed, unemployed, or economically inactive.
Claimant count: counts the total number of recipients of job seeker’s Allowance (JSA) added to those looking for work to claim universal credit.
What is long-term unemployment?
People who have been unemployed for 12 months or more.
Structural supply-side problem in the UK labour market.
What is mass unemployment?
When officially one person in ten in the labour force is out of work.
What is youth unemployment?
Measured unemployment rate for all 16-24 year olds.
What are discouraged workers?
People who have ceased to seek work because they believe there are no suitable available jobs.
What is hidden unemployment?
The number of people who do not have work but who are not counted in government reports.
What is gig economy?
Work arrangement where people perform short-term flexible, and often freelance work, typically through online platforms/apps.
Often work on a project-by-project basis, sometimes for multiple clients at once.
e.g. rideshare drivers, freelance writers, virtual assistants and food delivery workers.
What is seasonal unemployment?
Seasonal workers might be without paid jobs due to the time of year when there are seasonal changes in demand, production, and employment.
What is frictional unemployment?
Caused by workers seeking a better job or who are between jobs.
Affects people who are new entrants to the labour market e.g. school leavers and college/university graduates.
How can frictional unemployment be reduced?
Making information on jobs more available and making job search more affordable via cheaper transport or subsidies.
What is structural unemployment?
Caused by lack of suitable skills for jobs available; a result of de-industrialisation (decline in manufacturing).
Stay unemployed due to disincentive effects from the tax and welfare system.
Can happen because of other barriers to people finding work e.g. unaffordable housing, high cost of childcare, and expensive transport services.
What is cyclical unemployment?
Involuntary unemployment due to a lack of AD for goods and services.
Caused by the ups and downs of the business cycle.
What is real wage unemployment?
Idea that unemployment is caused by wages being too high relative to the productivity of workers.
What is real wage rigidity?
Wage rigidity happens when workers are reluctant to see their real wages fall during an economic downturn.
Real wages drop when nominal wages don’t rise as fast as prices.
Keynesian argues that wages can be “sticky”/slow to adjust downward because of the long-term labour contracts, trade union collective bargaining agreements, and social norms about fair pay.
What is voluntary unemployment?
When individuals choose not to work for various reasons, even though suitable job opportunities are available to them.
What is economic inactivity?
People of working age but not in work who have not been looking for a job within the last 4 weeks.
What are the consequences of high unemployment?
Waste of scarce labour resources.
Leads to lost output, slower growth, and potentially a reduction in a country’s potential trend rate of growth (due to economic scarring)
There are large fiscal costs for the government with higher welfare spending and reduced tax revenues.
High long-term unemployment ca worsen income inequality.
Labour market failure
What is under-employment?
Workers are under-utilised in terms of their ability, formal qualifications, and experiences.
Occurs when people are counted as:
Looking for an extra job or actively searching for a new job with longer hours to replace their current job.
They prefer to work longer hours in their present job.
What are demand-side policies to cut unemployment?
Fiscal stimulus: increasing public spending/cutting taxes to increase AD, which can stimulate economic growth and increase employment.
Monetary policy: lowering interest rates which can encourage businesses and consumers to spend and invest more, boasting AD and employment.
Depreciating currency: Imports become more expensive for domestic consumers, leading to more demand for domestic services.
Cutting the cost of employing extra workers: reduction in the rate of national insurance contributions, financial support for apprenticeships/other job schemes, extra funding for regional policy.
What are supply-side policies to cut unemployment?
Tax cuts: increased profits and investment for businesses leading to more hiring and increased productivity.
Deregulation: removing unnecessary regulations can reduce costs for businesses and encourage innovation and investment which creates new jobs.
Labour market reforms: making it easier to hire and fire workers can improve labour market flexibility and reduce structural unemployment.
Education and training: Investment in it can improve the skills of the workforce, increase their productivity, and improve occupational mobility.
What are the barriers to reaching full-employment?
Economic cycles: create fluctuations in the level of unemployment.
Structural unemployment: arises from a mismatch between the skills and qualifications of job seekers and the requirements of available jobs.
Geographic disparities: in some areas of the UK, there may be higher levels of long-term unemployment due to the lack of job opportunities/industries in decline.
Automation and technological advancements
Underemployment: achieving full employment does not necessarily mean that everyone is in high-quality, full-time work.
What is inflation?
A sustained rise in an economy’s general price level meaning that on average, the prices of goods and services increases over time.
